Shenzhen is the New Hotpot

So I wanted to follow up the piece for Bloomberg about reforming the Chinese Share economy along the framework of Shenzhen. I should say I am somewhat biased in that I have lived in Shenzhen for almost seven years, but also clear up a couple points of confusion.

I understand and am not arguing that every city in China should try and become a Silicon Valley like Shenzhen. That is not the point.

Shenzhen has recognizable geographic advantages, primarily being so close to Hong Kong, but in reality few other benefits. In fact, like many great places, Shenzhen has turned its lack of abundance into abundance.

Rarely do people think of scarcity of resources as a good thing but many economies with scarce resources have exemplary outcomes. Whether you look at resource poor countries like Singapore or resource rich countries like Russia and Venezuela. This isn’t to imply that lack (or abundance) of resources is a good (or negative) thing. Only that resources are not remotely close to economic destiny.

Shenzhen in reality is a very small town geographically and other than proximity to Hong Kong has very little in the way of natural resources. It is essentially boxed in with mountains to the north and the sea/Hong Kong to the south.

What Shenzhen lacks in political (Beijing) or historical (Shanghai) influence, it makes up for in sheer determination. People from all over China migrate to Shenzhen and people are pretty accepting of other Chinese because most people aren’t from Shenzhen. People move to Shenzhen because they want to work hard and make money. Now this has lead to complaints by locals that people aren’t invested in the city personally or there is a lack of civil spirit but even in my time here I sense that is changing.

Even my Chinese friends and colleagues comment how open Shenzhen is to hard work and talent compared to other Chinese cities. Because most everyone here is from other parts of China you do not have those path dependencies you have in other cities. People know each other first through business ties and talent rises to the top. I frequently hear, even from some Shanghaiese friends who now live in Shenzhen that in Shanghai, unless you are Shanghaiese, you cannot get accepted into the city. Shenzhen it is about how good you are at what you do. Shenzhen is like the New York City of China in the sense that people come thinking “If I can make it there, I can make it anywhere.”

One thing I hear frequently is how local government thinks of itself much more as a facilitator. This isn’t to say the Shenzhen government isn’t heavy handed with some of the standard Chinese traits, but I hear frequently from business how they are much better to deal with than other governments throughout China.

Even the internal ethos of the city is different. Conversations here start up about when you hope to IPO the company you work for with little if anything said about politics. It isn’t even that people are afraid to talk about politics, but simply that people have better things to worry about and more important things to do. Though I don’t think it is as helpful as other cities, people are quicker in Shenzhen to help each other out, make introductions, or just lend a hand on a big project. I’ve personally found the people relatively welcoming. We have neighbors that when my children need help with Chinese homework are happy to help.

Not every city can be Shenzhen or should be Shenzhen. I’ve been asked questions about who should Shenzhen try and emulate and I always respond something along the line of why can’t Shenzhen be Shenzhen? What are the advantages Shenzhen has that it can build upon. I was told a story about one city that was told to shift out of heavy industry and was given a list of a couple of preferred industries. They chose biotech and built a bunch of business parks with good lab facilities. Did they have any biotech companies? No. University cluster? No. Highly educated population that could start biotech or related companies? No. The point is that to transition, Chinese cities need to focus on building upon what they have rather than pointless expansions.

Shenzhen considers itself a very different city from the rest of China and think of Beijing almost as background noise. Beijing has the power, Shanghai thinks they have the power, and Shenzhen just goes out and does stuff ignoring whatever comes out of Beijing. In the old musical Fiddler on the Roof, an old man approaches the village rabbi and asks with a concerned look “Rabbi, is there a blessing for the Tsar?”. The bespectacled Rabbi strokes his beard thinks and raises his hands: “may God bless the Tsar and keep him very far away from us.” Shenzhen thinks of Beijing much the same way.

China needs a good dose of creative destruction. One of the very real benefits of Shenzhen is that it has almost no path dependent industries. There is no steel industry to figure out how to dismantle. It is creating from scratch. Many Chinese provinces and cities need to destroy the past to build up the new. The Chinese are enormously innovative they just use that energy most of the time to evade the ridiculous regulations that are created by their leaders.

There are seriously innovative things going on. Yes, many of them simply derivative and Chinese market remains largely closed to foreign competition but there are very real innovative things happening. Payment systems are light years ahead of anything I’ve seen elsewhere. Life in many ways is somewhat convenient given all the things you can have delivered directly to your door and the ability to just phone a car to come pick you up as you are walking outside. Yes, Xiaomi is loaded with spyware and Baidu is nothing but an information tool of the Propaganda Ministry but that doesn’t mean they aren’t good at what they do in China. There are other companies that are doing innovative things and time will tell how much of an impact they make as most of it remains consumer retail type platforms. It is happening though for sure.

This does not in any way take away from the enormous challenges facing all of China. This slice of the economy remains very small and simply will not provide the job or economic growth gains needed to transition this economy away. Whether it is the labor frictions of transition coal miners to coding or the massive bad debts that China refuses to face up to.